Evidence of an American Plutocracy: The Larry Summers Story

Evidence of an American Plutocracy: The Larry Summers Story
By Matthew Skomarovsky  •  Jan 10, 2011 at 19:31 EST

“So here is the evidence for an American plutocracy of a narrow and  
discrete but hardly harmless sort. Wall Street seduced the economics  
profession not through overt corruption, but by aligning the  
incentives of economists with its own. It was very easy for academic  
economists to move from universities to central banks to hedge funds —  
a tightly knit world in which everyone shared the same views about the  
self-regulating and beneficial effects of open capital markets. The  
alliance was enormously profitable for everyone: The academics got big  
consulting fees, and Wall Street got legitimacy. And it has kept the  
system going despite the enormous policy failures it has generated,  
not to exclude the recent crisis.”
—Francis Fukuyama, The American Interest, January 2011

Larry Summers’ path to the Obama administration, and his record within  
it, are symptomatic of a new American plutocracy, and his new job at  
Harvard will keep the gears of corruption greased.

Summers rose to power under the protective wing of Wall Street and  
Democratic Party mogul Robert Rubin. He aggressively advanced Rubin’s  
program of financial deregulation and faithfully rescued his cronies  
when deregulation went wrong. Despite the economic catastrophes these  
policies have contributed to, Summers and other Rubinites have  
continued their political ascendancy in recent years, filling top  
positions in the Obama administration.

Obama’s economic program, developed almost entirely by Rubin’s  
proteges, has received widespread popular condemnation for bailing out  
Wall Street while leaving Main Street out in the cold. Summers has  
become a defining symbol of the latest sold-out administration within  
a sold-out system of government. His departure from the White House is  
more a reflection of this public anger than a personal career choice.

But strategic sensitivity is not change. Summers’ exit does not  
significantly diminish Rubin’s shadow over the White House, nor does  
it mark an end or pause in the vicious cycle of today’s crony  
capitalism. Obama has replaced Summers with a less notorious Rubinite,  
and the Harvard research center Summers will now direct provides a  
name-brand intellectual cover for, not an alternative to, the  
dangerously insular politics his career has thus far embodied.


The Road to Obama is Paved with Rubin

“A relatively senior figure on Wall Street said to me years ago that  
many of the most important business relationships he had were with the  
people he met through his other activities. He had found that his  
business and non-business lives fed each other to the benefit of both.”
—Robert Rubin, Harvard Business School Commencement, 2000

Summers’ arrogant personal style is known to be politically toxic, so  
he’s been fortunate to have Robert Rubin as a guardian angel easing  
his way to political stardom. Rubin is what you might call a Wall  
Street godfather. He joined Goldman Sachs in 1966 and rose to co-CEO  
and then co-chairman before joining the Clinton administration in 1993  
as the first ever director of the National Economic Council, the same  
position Summers is leaving from now. Summers, a lower level Treasury  
official at the time, had already endeared himself to Rubin in the  
80s, consulting to Goldman Sachs and then working with Rubin on the  
Dukakis campaign. When Rubin rose to Secretary of the Treasury in  
1995, Summers became his deputy.

While running Treasury over the next six years, the two, along with  
Federal Reserve Chairman Alan Greenspan, were chiefly responsible for  
the neoliberal economic reforms that allowed banks to market and trade  
derivatives without oversight or transparency, combine in dangerous  
ways, take excessive risks, and recover losses when big loans to  
companies and foreign governments went sour. During the Asian  
Financial Crisis of 1997-1998, Time Magazine famously labeled the  
three “The Committee To Save he World”, which is now a running joke  
because financial deregulation allowed big banks to almost destroy the  
world ten years later.

When Rubin left Treasury in 1999 to become Chairman of the Executive  
Committee of Citigroup, he persuaded President Clinton to name Summers  
as his replacement. Citigroup was a new banking conglomerate made  
possible by laws Rubin and Summers supported and implemented at  
Treasury, and it paid Rubin over $100 million in the next ten years.

Another new business model Rubin and Summers made possible was Enron.  
Rubin had known Enron well through Goldman Sachs’s financing of the  
company, and recused himself from matters relating to Enron in his  
first year on the Clinton team. He and Summers went on to craft  
policies at Treasury that were essential to Enron’s lucrative energy  
trading business, and they were in touch with Enron executives and  
lobbyists all the while. Enron meanwhile won $2.4 billion in foreign  
development deals from Clinton’s Export-Import Bank, then run by  
Kenneth Brody, a former protege of Rubin’s at Goldman Sachs.

Soon after Rubin joined Citigroup, its investment banking division  
picked up Enron as a client, and Citigroup went on to become Enron’s  
largest creditor, loaning almost $1 billion to the company. As  
revelations of massive accounting fraud and market manipulation  
emerged over the next years and threatened to bring down the energy  
company, Rubin and Summers intervened. While Enron’s rigged  
electricity prices in California were causing unprecedented blackouts,  
Summers urged Governor Gray Davis to avoid criticizing Enron and  
recommended further deregulatory measures. Rubin was an official  
advisor to Gov. Davis on energy market issues at the time, while  
Citigroup was heavily invested in Enron’s fraudulent California  
business, and he too likely put pressure on the Governor to lay off  
Enron. Rubin also pulled strings at Bush’s Treasury Department in late  
2001, calling a former employee to see if Treasury could ask the major  
rating agencies not to downgrade Enron, and Rubin also lobbied the  
rating agencies directly. (In all likelihood he made similar attempts  
in behalf of Citigroup during the recent financial crisis.) Their  
efforts ultimately failed, Enron went bust, thousands of jobs and  
pensions were destroyed, and its top executives went to jail. It’s  
hard to believe, but there was some white-collar justice back then.

Over the years Rubin’s connections and financial experience had made  
him an influential figure at Harvard, his alma mater. He helped  
oversee Harvard’s endowment before joining Treasury and had been a key  
fundraising link to big donors on Wall Street and in the Democratic  
Party. When Clinton’s second term ended in 2001, Rubin lobbied to get  
Summers the job of Harvard president, and then joined Summers on  
Harvard’s governing board the next year.

Summers’ presidency at Harvard was plagued with scandals, including  
some that didn’t come to light until years after he left, including  
his decision to invest a large part of Harvard’s endowment in risky  
interest rate swaps that ultimately lost the school more than a  
billion dollars. While his personal admonishment of professor Cornel  
West for recording a rap album made headlines, Summers quietly  
consulted with a hedge fundfounded by Rubin proteges Brody (see above)  
and Frank Brosens, and after being forced out of Harvard in 2006 he  
began touring Wall Street more frequently, and made$5 million a year  
working one day per week at hedge fund D.E. Shaw.

Summers also starting showing up around the Hamilton Project, which  
Rubin had just founded with hedge fund manager Roger Altman. Altman  
was another Clinton official who had come from Wall Street, following  
billionaire Peter Peterson from Lehman Brothers to Blackstone Group,  
and he left Washington to found a major hedge fund in 1996. The  
Hamilton Project is housed in the Brookings Institution, a prestigious  
corporate-funded policy discussion center that serves as a sort of  
staging ground for Democratic elites in transition between government,  
academic, and business positions. The Hamilton Project would go on to  
host, more specifically, past and future Democratic Party officials  
friendly to the financial industry, and to produce a stream of  
similarly minded policy papers. Then-Senator Obama was the featured  
political speaker at Hamilton’s inaugural event in April 2006.

Summers joined major banking and political elites on Hamilton’s  
Advisory Council and appeared at many Hamilton events. During a  
discussion of the financial crisis in 2008,Summers was asked about his  
role in repealing Glass-Stegall, the law that forbade commercial and  
investment banking mergers like Citigroup. “I think it was the right  
thing to do,” he responded, noting that the repeal of Glass-Stegall  
made possible a wave of similar mergers during the recent financial  
crisis, such as Bank of America’s takeover of Merrill Lynch. He was  
arguing, in effect, that financial deregulation did not cause the  
financial crisis, it actually solved it. “We need a regulatory system  
as modern as the markets,” said Summers — quoting Rubin, who was in  
the room. “We need a hen house as modern as the food chain,” said the  
fox.

A year after co-founding the Hamilton Project, Rubin was named Co- 
Chairman of theCouncil on Foreign Relations (CFR), another policy  
discussion group as prestigious as Brookings but bipartisan and  
internationally focused, replacing CFR chair Peter Peterson and  
cementing Rubin’s dominance in the top echelon of policy elites.  
Rubin’s son Jamie, became a major Wall Street fundraiser for Obama  
during these years — Wall Street was Obama’s biggest source of early  
cash — and although Rubin tepidly endorsed Hillary Clinton in 2007,  
many of Rubin’s proteges, including Summers, became top advisors to  
Obama’s presidential campaign and later to his administration. Rubin  
continued to hold a top position at Citigroup up until the bank almost  
went bust from its subprime mortgage investments but was saved by a  
government bailout engineered by the Bush administration and  
candidates Obama and McCain in September 2008. Michael Froman, a close  
friend and advisor to Obama who had worked as Rubin’s chief of staff  
for many years, was also a top executive at Citigroup at the time of  
the bailout.

Better than the Great Depression

“An awful lot of thoughtful people think … if you project out twenty  
years … the period that we’re in right now is going to look like the  
deterioration of the American economy, both in absolute terms and  
relative to other parts of the world.”
—Robert Rubin, The Politics of Message, 1989

Summers, Froman, and other Rubinites from the Clinton team — including  
Tim Geithner, Gene Sperling, Jason Furman, Neal Wolin, Jack Lew, and  
Gary Gensler — reunited in the Obama administration, as countless  
writers have documented in detail. Other Obama officials from outside  
Rubin’s network also came from Wall Street. Together, and in  
collaboration with their contacts in the private sector, they crafted  
an economic recovery plan that quickly restored financial profits  
through backdoor bailouts, and eventually corporate profits more  
generally, but failed to remedy the jobs and housing meltdown:

2008	2010
Bank profits	128 billion	367 billion*
Corporate profits	1.25 trillion	1.66 trillion*
Underemployed people
21 million	25.7 million
Foreclosures since 2009	-	3.4 million
* annualized from Q3 2010
As Obama’s top economic advisor, Summers was responsible for much of  
it, and he became iconic of a White House that made frequent populist  
odes to change but rehired all the old Wall Street cronies and  
operated by Wall Street’s “out of touch” logic from day one. That  
defenders have been forced to measure Summers’ success against the  
Great Depression is indicative of his unpopularity as well as the  
administration’s tone deafness to the deepening economic insecurity of  
the middle class, much of which is experiencing a depression.

In a bigger sense, the decades-long dance of Rubin and Summers in and  
out of Washington has become emblematic of a second Gilded Age that  
wouldn’t even measure well against the first one from a century ago.  
Much of the public has come to view the Obama Administration as the  
latest round in a quickening game of musical chairs, played by the  
same old politicians who owe their fortunes or their careers to the  
same financial institutions that destroyed the economy, each round  
further consolidating their unaccountable power, each round bringing  
fresh disillusionment.

Words like “plutocracy”, “oligarchy”, “kleptocracy”, and even “banana  
republic” are quickly gaining traction in political discourse. The  
Fukuyama quote at the top of this article comes from a new issue of  
The American Interest Magazine devoted to the question, “Are  
Plutocrats Drowning Our Republic?”, and here’s a small sampling of  
other recent ones:

“Millions of Americans have awakened to a sobering reality: they live  
in a plutocracy, where they are disposable.” (Bill Moyers)

“Government has been disabled or captured by the formidable powers of  
private enterprise and concentrated wealth.” (William Greider)

“America has been busy ‘building a bridge to the 19th century’ — that  
is, to a new Gilded Age.” (Frank Rich)

“Never before has the United States looked so much like a country of  
the rich, by the rich, and for the rich.” (Andy Kroll)

“What kind of a country do we aspire to be? Would we really want to be  
the kind of plutocracy where the richest 1 percent possesses more net  
worth than the bottom 90 percent? Oops! That’s already us.” (Nicholas  
Kristof)

Elites still speak seriously about “public service”, but fewer people  
buy it. As big business feeds more top executives into government  
positions, floods elections with more money, and gets away with more  
costly and egregious crimes, it’s easy to see that public interest is  
being replaced by private profit as the driving force in politics.  
This process is a vicious cycle, since the effects it produces —  
concentrated wealth and political power — are also its causes.

Society’s Most Challenging Problems

“The great research universities of America are a tremendous economic  
resource for the country.”
—Robert Rubin, June 4, 2008

Trillion-dollar back scratching at the intersection of business and  
government has become one of the most widely recognized and resented  
problems in modern politics. You might think, then, that a Harvard  
research center founded to “advance the state of knowledge and policy  
analysis concerning some of society’s most challenging problems at the  
interface of the public and private sectors” would place priority on  
restoring some accountability to American democracy. You might think  
that Summers’ move to such a center would mark a turn away from the  
influence of money towards the integrity of critical research and  
debate.

Think again. Private profit is undermining the legitimacy of academic  
institutions as well, and recent studies of conflicts of interest and  
disclosure in the economics profession have demonstrated how pervasive  
the quiet flow of money in the academy can be. Summers is still highly  
respected as an academic in the mainstream, even though he has earned  
millions from speaking and consulting to banks in recent years. That’s  
partly because Summers, like most economists, doesn’t disclose  
potential conflicts when he publishes economic articles or opinion  
pieces. Of course, he has an incentive not to: his Wall Street ties,  
milked in private, are good for power and money, but threaten his  
public reputation as an intellectual and public servant. What’s  
incredible is that many leading economists, who spend their days  
thinking about the mechanics of incentives and self-interest, don’t  
even seem to know what a conflict of interest is. Charles Ferguson’s  
excellent documentary, Inside Job, illustrates this phenomenon in  
interviews with top economists at Columbia and Harvard who served in  
the White House and Federal Reserve. Ferguson’s talk with Glenn  
Hubbard, Bush’s first NEC director and architect of the Bush tax cuts,  
is particularly revealing:

FERGUSON: Do you think that the economics discipline has, uh, a  
conflict of interest problem?

HUBBARD: I’m not sure I know what you mean.

FERGUSON: Do you think that a significant fraction of the economics  
discipline, a number of economists, have financial conflicts of  
interests that in some way might call into question or color –

HUBBARD: Oh, I see what you’re saying. I doubt it. You know, most  
academic economists, uh, you know, aren’t wealthy businesspeople.

…

FERGUSON: I’m looking at your resume now. It looks to me as if the  
majority of your outside activities are, uh, consulting and  
directorship arrangements with the financial services industry. Is  
that, would you not agree with that characterization?

HUBBARD: No, to my knowledge, I don’t think my consulting clients are  
even on my CV, so –

FERGUSON: Uh, who are your consulting clients?

HUBBARD: I don’t believe I have to discuss that with you.

FERGUSON: Okay. Uh, uh –

HUBBARD: Look, you have a few more minutes, and the interview is over.

…

FERGUSON: Do they include other financial services firms?

HUBBARD: Possibly.

FERGUSON: You don’t remember?

HUBBARD: This isn’t a deposition, sir. I was polite enough to give you  
time; foolishly, I now see. But you have three more minutes. Give it  
your best shot.

The faculty at the Mossavar-Rahmani Center for Business and Government  
(CBG), which Summers will now direct, probably wouldn’t have better  
answers than Hubbard. The CBG is a part of the Harvard Kennedy School,  
a graduate school for government policy makers that houses policy  
research and discussion groups, much like Brookings and CFR. The  
Center was founded in 1982 and lengthened its name in 2005 when Bijan  
Mossavar-Rahmani, an oil man, and his wife Sharmin, a Goldman Sachs  
executive, gifted the Center $15 million.

Corporate cash pays for every program under the CBG. Bijan previously  
spent almost a decade as a top executive at Apache Corporation. Apache  
and its founder, Raymond Plank, are major donors to the Center’s  
Consortium for Energy Policy Research (CEPR) at Harvard, funding its  
faculty chair, Professor William Hogan. CEPR itself, whose stated goal  
is “to address the grand challenge of the 21st century: to develop  
secure, safe, clean, and affordable sources of energy to power world  
economic growth for present and future generations while protecting  
the environment from the impacts of global climate change”, is  
primarily funded by Shell Corporation.

Another program at the Center, the Corporate Social Responsibility  
Initiative, issponsored by nefarious corporate abusers like Chevron,  
Coca-Cola, and Microsoft, as well as Walter Shorenstein, a recently  
deceased billionaire real estate developer and one of the biggest  
Democratic donors over the past half-century. The CSRI apparently sees  
nothing problematic in taking Coca-Cola money and producing polished  
reports aboutCoca-Cola’s model social responsibility record in Africa  
while corporate watchdog Global Exchange has named Coca-Cola as a  
“most wanted” human rights violator, a leader in “the abuse of  
worker’s rights, assassinations, water privatization, and worker  
discrimination.” In Africa, “by regularly denying health insurance to  
employees and their families, Coca Cola has failed to help stop the  
spread of AIDS in Africa. The company is one of the continent’s  
largest private employers, yet only partially covers expensive  
medicines, while not covering generic medicines at all.” Chevron,  
another of the CSRI’s original funders, is also on Global Exchange’s  
most wanted list, “guilty of some of the worst environmental and human  
rights abuses in the world.”

The Harvard Environmental Economics Program (HEEP) is similar.  
Primarily funded by Shell and Enel, Italy’s privatized national energy  
company, as well as the Duke Energy fortune, the program lists a  
council of advisors full of executives from Duke Energy,  
ConocoPhillips, Enel, Energy Future Holdings, Lehman Brothers, Morgan  
Stanley, and Barclays. One advisor, William K Reilly, was EPA  
administrator under Bush, runs a private equity firm, sits on several  
energy company boards, and recently co-chaired the BP Oil Commission.

It should come as no surprise at this point that the Health Care  
Delivery Policy Program’ssponsors included industry giants Aetna, Blue  
Cross Blue Shield, Merck, and Stryker.

How do these people defend such obvious conflicts of interest? The  
case of another CBG project, the Harvard Electricity Policy Group  
(HEPG), is instructive. HEPG is also chaired by CEPR’s Professor  
Hogan, and is funded by dozens of energy companies with a good deal of  
common financial interest in electricity policy. Ten years ago  
HarvardWatch wrote about Harvard’s role in promoting Enron-backed  
energy deregulation in its report, “Trading Truth”, noting that Enron  
was a major contributor to HEPG while “much of the research agenda of  
the HEPG [centered] on deregulation of the electricity market” — the  
central component of Enron’s fraudulent business model. Hogan authored  
numerous studies, sometimes in collaboration with a consulting group  
that received funding from Enron, arguing against market manipulation  
as a cause of the California Electricity Crisis, and against price  
caps as a solution, positions that were proven wrong but highly  
favorable to Enron. We now know from Enron emails that the company was  
moreover planning to take professor Hogan and others on an “energy  
deregulation road tour” across the country to persuade other states to  
adopt the California model.

In response to the HarvardWatch report, Hogan and HEPG’s executive  
director argued in response that Enron was only one among many  
funders, that HEPG didn’t take official positions on policy, that many  
of Hogan’s conclusions about the California electricity market had  
contradicted Enron’s. All of that is true, and that’s why the Center’s  
structure works. It’s also why the Brookings Institution and CFR have  
emerged in recent decades as the government and media’s favorite  
sources of new political solutions. Corporate-friendly proposals that  
arise organically from discussions between government and business  
elites brought together within old institutions funded by a long list  
of corporate and wealthy individual donors are much more politically  
viable than those coming directly from a bank lobbyist, an oil  
company, or a group closely affiliated with one. Corporations don’t  
dictate specific views, they nurture hundreds of views within a safely  
constrained spectrum and run with what works best.

The conflicts of interest at CBG are pervasive, but not ubiquitous, so  
there are always counter-examples for Hogan to cite. Many events and  
research projects don’t interest the companies funding them, and those  
that do are not always favorable. Current Senior Fellows include  
bankers from Goldman Sachs, Morgan Stanley, Lehman Brothers, Wells  
Fargo, and Salomon Brothers, but there are many others from academia,  
government, or elsewhere in the private sector. The Center has hosted  
dozens of events promotingobvious corporate talking points, as well as  
events with more diverse and critical views.

But how many of CBG’s hundreds of faculty, fellows, or events have  
ever substantially undermined the interests of the Center’s sponsors,  
and how many have advanced them? If a CBG program was mostly critical  
of a sponsor, would it stay funded? If the Center’s sponsors created  
the same research center with the same faculty and staff outside of an  
academic institution, would it have the same credibility? Would CBG  
academics ever push for corporate social responsibility rules that  
would hurt Coca-Cola’s bottom line?

Harvard, like any university, is always in search of money to add to  
and expand its programs. Its fundraising offices contantly reach out  
to wealthy alumni and their companies about possible donations and  
what they might fund. Harvard faculty, facing cutbacks and  job  
insecurity, need resources and attention to defend and advance their  
careers, and are attracted to positions backed by a fresh flow of big  
money. Big business, on the other hand, is constantly looking for the  
most effective PR its charitable giving can buy and new ways to  
strengthen its influence over government policy. Meanwhile, currently  
serving politicians and their staff are especially receptive to policy  
reforms backed by their corporate friends and donors but credible to  
the public. Finally, elites entering and exiting government need  
transitional work, more prestigious education for their resumes, and  
opportunities to network and test new ideas in a competitive but  
collegial environment.

These four needs converge in the form of academic policy institutes  
like the Center for Business and Government. This system works well  
for Harvard, for its faculty, for corporate donors, and for government  
elites — so long as the influence of money remains obscured by the  
open nature of the institution. To the CBG and its architects,  
“society’s most challenging problems at the interface of the public  
and private sectors” don’t include corporate capture, which plagues  
the Center itself. The primary challenge for the CBG in the 21st  
century is rather to construct a benign intellectual cover for a new  
era of blatant crony capitalism, keeping the sleazy networks at the  
center of the corporate-government universe well lubricated but  
invisible to the public.

Larry Summers has his job cut out for him. He might want to keep his  
hedge fund work to one day per week.

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